One-Third of EU Nations Breach Fiscal Rules as Spending Pressures Mount

A third of the European Union’s member states, representing about half the bloc’s population, are now in violation of its fiscal rules, with Austria becoming the latest country to join the list.

The European Commission has reprimanded nine nations, the largest group since the eurozone debt crisis, for running budget deficits above the 3% of gross domestic product (GDP) threshold. These countries will now be placed under closer supervision from Brussels through the so-called “excessive deficit procedure” and could face fines if they fail to meet fiscal targets agreed upon with the Commission.

The expanding list highlights the broader fiscal challenges confronting the region as governments grapple with increased rearmament costs driven by the threat from Russia, alongside existing pressures on public spending from anemic growth and aging populations.

Austria’s Fiscal Slide

Austria’s inclusion is particularly notable. The country, which posted a 4.7% deficit last year, once held a top-tier credit rating and now stands one notch below that at the three main rating agencies. The Austrian government is now under tight scrutiny as it attempts to repair public finances while avoiding an extension of what is already its third consecutive year of recession.

“The opening of an excessive deficit procedure due to a deficit is considered justified for Austria,” the Brussels report stated. “The Commission intends to propose to the Council the opening of excessive deficit procedures for Austria and to propose relevant recommendations to end the situation of excessive deficit.”

A former champion of fiscal austerity, Austria has loosened its discipline with generous benefits to counter inflation and higher social spending. It is also the only EU economy the Commission projects will shrink this year.

Finance Minister Markus Marterbauer, a Social Democrat in the three-party government, plans to reach the 3% deficit target only by 2028, even after announcing €6.3 billion in savings measures this year as the centrist cabinet seeks to spread out the impact of cuts.

The other countries reprimanded by Brussels for similar fiscal breaches are Belgium, France, Hungary, Italy, Malta, Poland, Slovakia, and Romania.

France in the Spotlight

Among the violators, France stands out as its fiscal troubles have sparked concern in the markets. Prime Minister François Bayrou last week pledged a multi-year budget plan in July aimed at reducing the deficit. This year’s deficit is targeted at 5.4%, and the government has previously committed to bringing it down to 3% by 2029.

While Italy remains on the Commission’s list, its efforts to consolidate its swollen public finances are expected to bring its deficit below the EU limit as soon as next year.

Romania faces the most severe rebuke. Brussels officials have urged the government to adopt immediate measures to curb its deficit following a turbulent political period, though they stopped short of imposing sanctions or suspending EU funds.

At the same time, the Commission identified Ireland, Cyprus, Luxembourg, and the Netherlands as member states with the most significant deterioration relative to fiscal targets, but they face no consequences due to their healthy deficit and debt levels.

The need for European rearmament is one of the fiscal pressures the EU has acknowledged. Brussels has granted some flexibility on this front, with 16 member states requesting fiscal leeway of up to 1.5% of GDP for military spending to be excluded from oversight.

Economies that fail to keep deficits and debt levels below 3% and 60% of GDP, respectively, could face sanctions if their governments do not rein in spending or raise taxes in a timely manner—though this has never happened in practice.